This past week we’ve seen a significant reduction or even outright elimination of many of the downside risks that have created clouds of uncertainty both in Washington and in financial markets over the past several months. The most substantial clarifying event was the announcement of the Phase 1 deal between China and the U.S.

However, we would caution investors against assuming that all policy uncertainty has been eliminated.

A fragile truce

While we will not likely see the details of the “skinny deal” until January, last week’s agreement between the world’s two largest economies is no doubt a welcome development. It represents not only a reprieve in escalation (i.e., no additional December tariffs), but also a small de-escalation (tariff rates on $120 billion of goods were cut from 15% to 7.5%) and some movement on issues such as intellectual property and goods purchases.

With that said, in spite of the Phase 1 deal, substantial tariffs (e.g., 25% on $250 billion of Chinese goods) will remain, and we would temper expectations for a Phase 2 deal given how difficult the easier Phase 1 deal has been to complete and because many of the knottier, harder-to-agree-on structural issues have been shelved for Phase 2 negotiations (e.g., the subsidization of state-owned enterprises, or SOEs). As such, we expect tariffs to remain on at least some Chinese imports for the foreseeable future.

We would also caution that in spite of the agreement, the risk that tensions flare up with China in the new year still exists, especially if China fails to follow through on its commitment of goods purchases – commitments it has said it would adhere to only if there is market demand and conditions supported them. As such, we would characterize the Phase 1 deal as welcomed but more of a fragile truce than a permanent settlement.

Other policy risks easing

Outside of the China-U.S relationship, policy uncertainty will most likely be eliminated on two other issues, including the United States-Mexico-Canada Agreement, the successor to NAFTA, which looks like it could pass the Democratic-dominated House of Representatives as early as this week. The agreement on the USMCA will help some domestic industries, but it is most consequential in what it will avoid – namely, it will prevent the president from moving forward with his threat to withdraw from NAFTA, a policy tail risk we identified at the beginning of the year and an uncertainty that has cast a pall over US-Canada-Mexico relations and markets.

Finally, a government shutdown in December like the one we saw last year also looks likely to be averted with a recent compromise deal announced to fund the government through next year. The deal avoids a “continuing resolution” that would keep spending levels flat, and comes with an increase in federal spending of about $50 billion for 2020, which will give a small but welcome boost to the economy, especially as President Trump enters an election year.

For more on trade, please see, “ Impeachment Could Be Both Bad News and Good News for Trade Policy.”

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Libby Cantrill is PIMCO’s head of public policy and a regular contributor to the PIMCO Blog